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Political Price Cycles in Regulated Industries; Theory and Evidence

  • Claudio Paiva
  • Rodrigo Moita

This paper develops a model of political regulation in which politicians set the regulated price in order to maximize electoral support by signaling to voters a pro-consumer behavior. Political incentives and welfare constraints interact in the model, yielding an equilibrium in which the real price in a regulated industry may fall in periods immediately preceding an election. The paper also provides empirical support for the theoretical model. Using quarterly data from 32 industrial and developing countries over 1978-2004, we find strong statistical and econometric evidence pointing toward the existence of electoral price cycles in gasoline markets.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/260.

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Length: 22
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/260
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  1. O'Neill, June, 1990. "The Role of Human Capital in Earnings Differences between Black and White Men," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 25-45, Fall.
  2. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  3. Bishop, John Hillman, 1989. "Is the Test Score Decline Responsible for the Productivity Growth Decline?," American Economic Review, American Economic Association, vol. 79(1), pages 178-97, March.
  4. Timothy Besley & Stephen Coate, 2003. "Elected Versus Appointed Regulators: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1176-1206, 09.
  5. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
  6. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
  7. Rodrigo M. S. Moita & Claudio Paiva, 2013. "Political Price Cycles in Regulated Industries: Theory and Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 94-121, February.
  8. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  9. Gordon Dahl, 1997. "Mobility and the Returns to Education: Testing A Roy Model With Multiple Markets," Working Papers 760, Princeton University, Department of Economics, Industrial Relations Section..
  10. Kevin M. Murphy & Sam Peltzman, 2004. "School Performance and the Youth Labor Market," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 299-328, April.
  11. Kenneth Rogoff, 1987. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
  12. Steven G. Rivkin, 1995. "Black/White Differences in Schooling and Employment," Journal of Human Resources, University of Wisconsin Press, vol. 30(4), pages 826-852.
  13. Paiva, Claudio A. C., 1996. "Electoral price cycles in regulated industries," World Development, Elsevier, vol. 24(10), pages 1673-1680, October.
  14. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
  15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  16. Spiller, Pablo T, 1990. "Politicians, Interest Groups, and Regulators: A Multiple-Principals Agency Theory of Regulation, or "Let Them Be Bribed."," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 65-101, April.
  17. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  18. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
  19. Peltzman, Sam, 1993. "George Stigler's Contribution to the Economic Analysis of Regulation," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 818-32, October.
  20. Ioannis N. Kessides, 2004. "Reforming Infrastructure : Privatization, Regulation, and Competition," World Bank Publications, The World Bank, number 13525.
  21. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
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